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The FinTech Chemist: The Race to Zero

Studying the properties and composition that make up the FinTech ecosystem

Welcome to this week’s industry analysis with the FinTech Chemist. When I say ‘the race to zero,’ I don’t necessarily mean absolute zero. Instead, it’s zero in the sense of zero commissions on online stock trades. A few weeks ago, Interactive Brokers announced a new product that offers commission-free stock trades. The pressure quickly mounted on rival retail brokerage firms like Charles Schwab, TD Ameritrade, and E-Trade Financial – there’s nothing more that I love than a good, old chain reaction.

In a recent press release, Interactive Brokers stated, “IBKR Lite will provide commission-free, unlimited trades on US exchange-listed stocks and exchange-traded funds. IBKR Lite will have zero commissions on US stocks and ETFs, no account minimums, no inactivity fees, free market data, in addition to other features.” New and existing clients will be able to select between using IBKR Lite and IBKR Pro and switch between the two levels of service up to three times and then once per quarter. “Interactive Brokers has always been known as the low-cost broker for sophisticated investors and institutions. We are able to provide superior pricing due to our focus on automation,” said Thomas Peterffy, Chairman & CEO of Interactive Brokers.

Several major brokerage firms followed suit, as they could no longer delay the inevitable. But, Charles Schwab, in particular, shook the investment world by announcing zero fees across all stock trading, pushing rival brokers TD Ameritrade, E-Trade, Ally Invest, and Fidelity to do the same just days later. According to Reginald Browne of GTS, “The name of the game is keeping clients and increasing assets. In other words, it’s all about scale. I think it’s about increased investor confidence and another log on the fire around transparency,” he said on CNBC’s ETF Edge. “The ETF industry has done a tremendous job around innovation. This is now nothing more than gale force winds behind the ETF industry to get more assets and to drive investor confidence and lower costs.”

While all of this is incredibly exciting, particularly for investors, they still need to read the fine print. Commission-free trading could prove to be too tempting for some investors. The more someone trades, the likelihood of poor returns increases, and investors could potentially see higher tax bills on short-term holdings. With trading commissions making up a chunk of revenue for many brokerages, don’t be surprised if they start offsetting the costs by charging less transparent fees to investors.

Interestingly, and somewhat unsurprisingly, the onus is now on FinTech startups like Robinhood. The company has run commission-free trades for years, and now they’ll need to figure out new ways to set themselves apart from the mega brokers. Now that the ‘race to zero’ is quickly coming to a close, the next battleground could be competitive interest rates.

Now, onto my next scientific… I mean FinTech hypothesis adventure. And, as always, remember to take your vitamins!

Read the previous edition of The FinTech Chemist

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